Ivette Martinez and Jorge Ventre examine how recent regulatory changes have reinforced Panama's strict KYC guidelines.
Panama has a long-standing history of flexible laws that facilitates the starting of a business. Corporations’ laws in Panama date back to 1927, with few amendments to date. The legal stability derived from a solid corporate regulation has enabled Panama to become one of the most important international financial centres.
Recent changes in Panama’s corporate legal regime are aimed to increase transparency in the use of these corporate vehicles and neutralise money laundering and financing of terrorism activities.
One of the most important changes in corporate regulations is the adoption of a custody regime applicable to bearer shares. On August 6, 2013, the Republic of Panama enacted to implement a system of custody or immobilisation of bearer shares certificates, Law 47 of 2013. This system is similar to those adopted by other jurisdictions such as the British Virgin Islands. More recently, on 23 April 2015 an amendment to Law 47 was enacted, by means of Law 18 of 2015 to require any existing corporations that have issued bearer shares prior to this law, to appoint an authorised custodian before 31 December 2015.
The authorised custodian (a bank, trustee, among others) will retain custody of the bearer share certificates and will keep all the relevant information of the beneficial owners. What happens if a shareholder wants to transfer his bearer shares? Because shareholders no longer hold the physical share certificates, the intervention of an authorised custodian is required for any transfer. Also, in the event the beneficial owner of the bearer shares is deceased, the custodian will require that a grant of probate or similar act be issued or obtained to transfer those shares to the heirs of the deceased shareholder.
By means of the also recently adopted Law 22 of 2015, Panamanian corporations have the obligation to maintain updated share registers and minutes’ registers. Corporations that do not comply are subject to a daily monetary fine and an annotation shall be made at the Public Registry to prevent its dissolution until this obligation has been fulfilled.
Why Did Panama Change the Regime?
Although Panama already had solid Know Your Client Regulations, Panama adopted the custody regime to comply with the standards of the OECD Global Forum on Transparency and the Exchange of Information for Tax Purposes and Recommendation 24 of the Financial Action Task Force (FATF).
The new regime of immobilisation of bearer shares reflects Panama’s commitment with the international fight against tax evasion and AML. However, while there may be many important reasons to use bearer shares, such as ensuring confidentiality and safety, Panama recognises the international community’s increased need of tax transparency.
The New Regime of Custody of Bearer Shares
The following is a list of the most important features of the new law:
Bearer shares issued prior to 24 April 2015 (the enactment date) shall have a grace period until 31 December 2015 to be placed into the custody with an authorised custodian.
Bearer shares issued after the enactment of the law must be placed with an authorized custodian within twenty days of issuance.
The regime will create a special framework that designates one or more beneficiaries for any and all bearer shares placed into custody, enabling authorized custodians to register openly the beneficiaries as the beneficial owners of such bearer shares while awaiting the probate.
After 31 December 2015, the articles of incorporation shall be deemed amended as a matter of law, to prohibit the issuance of bearer shares, except if prior to this deadline, said articles had been amended to expressly adopt the immobilisation regime.
There are two types of authorised custodians:
Local Authorised Custodians (attorneys, resident agents, trust companies, general licensed banks, brokerage or clearing houses regulated in Panama)
Foreign Authorised Custodians (trust companies, banks and financial intermediaries that are licensed and regulated). Foreign Authorised Custodians must register with the Panamanian Superintendence of Banks or the Superintendence of the Securities Market, accordingly.
Procedural Aspects of the Custodial Regime
Transfer of ownership of the bearer shares under custody shall be made as follows:
The owner must notify the transfer to the custodian, and
The assignee must deliver to the custodian a sworn declaration containing his full personal information and contact details.
Inheritance Rules Applicable to Bearer Shares Under Custody
Law 47 introduces a very positive innovation in the sense that if the beneficial owner of the bearer shares under custody has given written instructions to the custodian settling who shall receive the shares in the event of death of said owner, such directions shall be valid and will prevail over any right of succession. Thus, no probate will be required as long as the beneficial owner has given instructions to the custodian regarding the ownership of the shares.
But what happens if the beneficial owner dies without giving instructions in the event of his/her death? In this special case, the relevant succession rules (testamentary or intestate) would apply.
Positive Impacts of the New Regime of Custody
The risk of holding bearer share certificates is that if these are lost, the original holder may lose ownership. The new custody regime solves this problem to the extent that the bearer share certificates will be in safe keeping by the custodian.
Compliance - What Do Panamanian Banks Require?
The other side of the coin is the risk bearer shares poses to banks. Under international standards of compliance, banks are required to have knowledge of who is the ultimate beneficial owner of each bank account. Another example of why the system has changed is that a company that has issued bearer shares can change the ultimate beneficial owner several times in a single day without the bank finding out, reason why the Superintendence of Banks of Panama has also issued its own regulations requiring banks to apply enhanced due diligence requirements for companies which constitutional documents still allow bearer shares and even eliminating from the articles the possibility that bearer shares be issued.
The obligation to place into custody any bearer share certificates issued after the law entered into effect within 20 days after issuance, is effective as of 4 August 2015. Any bearer shares issued prior to the effectiveness of Law 47 must be replaced by registered shares or be placed into custody by 31 December 2015.
Many offshore financial centres are moving towards removing bearer shares to conform to the OECD requirements; however, Panama has found an innovative solution to protect privacy while still implementing mechanisms to control illegal activities by immobilizing bearer shares, rather than eliminating them entirely.
Ivette Martinez, Partner and Jorge Ventre, Associate, Patton, Moreno & Asvat